* Investors square positions ahead of U.S. data
* Friday's U.S. jobs report the key focus this week
* U.S. ISM index stronger than expected, boosts dollar
(Updates prices, adds quote, U.S. data)
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 4 (Reuters) - The dollar slid on Monday, after trading higher earlier in Asia, as investors locked in recent gains ahead of U.S. economic data this week that could firmly dictate the currency's direction in the coming months.
Optimism about the prospects for a U.S. recovery has supported the dollar recently but analysts said more evidence of a strengthening economy was needed to justify further gains.
A report showing the U.S. manufacturing sector expanded in December for a fifth straight month helped the dollar trim its losses against the euro. [ID:nN04236157]. But with the U.S. non-farm payrolls report looming on Friday, investors were hesitant to push the dollar higher.
"It's a pretty positive number and a good way to start the year," said Dan Cook, senior market analyst at IG Markets in Chicago, referring to the Institute for Supply Management survey.
"(But) it remains to be seen whether this will help or hurt the dollar. Whether people are speculating on interest rates or something else, the initial reaction (was) dollar positive."
Analysts also said an upbeat manufacturing survey out of the euro zone underpinned the euro, while a renewed rally in commodities, particularly crude oil, prompted buying of commodity currencies such as the Australian and Canadian dollars.
"Investors are squaring positions ahead of some key numbers." said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.
"Obviously, the jobs number will headline this week's data but we do have some numbers that will either confirm that a U.S. recovery is gaining traction or could dampen some of the recent enthusiasm that the dollar enjoyed."
In mid-morning New York trading, the euro
The single currency recovered from earlier falls, which took it as low as $1.4258, testing a key chart support level around $1.4229 where the 200-day moving average sits, and in sight of December's low around $1.4218.
A euro zone purchasing managers' survey, which confirmed the region's manufacturing sector expanded at its fastest rate in 21 months in December [ID:nLDE6030JH], also helped the euro against the dollar.
The ICE Futures' dollar index <.DXY>, a gauge of the greenback's performance against six other major currencies, fell 0.5 percent to 77.493.
Investors were jittery in a busy week for U.S. data that
culminates in the closely watched monthly jobs data on Friday.
The median forecast of analysts polled by Reuters is for payrolls to have fallen by 20,000 in December, which would be worse than November's decline of 11,000 jobs. However, the predictions ranged widely, from a loss of 80,000 jobs to an increase of 50,000. [ECI/US] (Additional reporting by Nick Olivari in New York and Jessica Mortimer in London; Editing by Andrea Ricci)